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10 Insights on Financial Analysis, Impact Investing and Annual Audits

This was the first panelist’s response to a question posed about interpreting grantee financials in our initial 2016 Essentials Series program on Philanthropic Finance.

The answer was clearly not what participants expected to hear when discussing finance. Throughout the conversation, panelists emphasized the importance of looking at financials in the context of the organization and what it is trying to achieve, instead of thinking there is one right answer.

We were fortunate to be joined by Kate Barr, executive director of the Nonprofits Assistance Fund; Rick Scott, vice president of finance and compliance for The McKnight Foundation; and Jennifer Tingley, principal overseeing the national foundation practice of CliftonLarsonAllen, for a conversation covering everything from interpreting nonprofit financials to impact investing to what to look for in audit reports.

For those unable to make the conversation, here are 10 insights shared, in no particular order:

While an income statement can provide yellow flags, a balance sheet can provide green and red flags related to the stability and sustainability of an organization.

What is the organization hoping to accomplish? Are they just starting up? Are they seeking to scale? Organizations in these two modes will convey very different financial pictures.

The most important thing to observe on an income statement is the organization’s one or two dominant sources of revenue. What is the reliability of the sources? Do they make sense according to the mission of the organization? Is the organization structured to support these sources of revenue?

On the balance sheet, it’s important to note if the organization had a surplus at the end of the year. Did they have positive unrestricted net assets at the end of the year? If not, what are they going to do differently? Have there been changes year over year?

When comparing the financials of two different organizations, ensure you are comparing similar types of organizations with similar missions.

In an annual audit report, there is value in the footnotes and “other matters” section. Among other important information, footnotes can tell you about requirements on an organization's debt.

It is important for program officers to be aware of the public support test and how a large foundation grant might “tip” the organization’s balance of 30% public support.

It would be a valuable perspective shift – according to Kate Barr – if we could reframe general operating support as “core mission support.”

It would also be great to see the field shift to supporting evaluation as readily as we support other core mission activities.

The concept of fiduciary responsibility is changing for foundation trustees. ESG (environmental, social and governance) investments – not simply maximizing financial return – are becoming key. According to Rick Scott, it is not always a trade-off in the financial return of a traditional investment and an ESG investment and the options for ESG investment products are expanding rapidly. Learning returns are considered alongside financial, social and environmental returns of The McKnight Foundation’s investment portfolio.

If you want to dig further, here are some great resources to get you started: